Trade Secret / Noncompete : Business, Employment, Intellectual Property, and Litigation Attorneys Focused on Trade Secret/Noncompete Issues

A bill has been introduced in the Illinois Legislature to create an "Illinois Covenants Not to Compete Act" (HB 4923, introduced January 15, 2010 by Rep. Rosemary Mulligan), following a previous failed effort on the same topic last year (HB 4040, introduced also by Rep. Mulligan).  While unlikely to be passed based on its current status (it has been re-referred in to the Rules Committee), as drafted it would introduce a few new twists into Illinois noncompete law. 

The bill would codify that, in order to be enforceable, the noncompete clause must be "narrowly tailored to support the protection of a legitimate business interest"  See Sec. 10, para. (c).  However, it also attempts to introduce certain new provisions that undoubtedly would change the landscape somewhat. 

For example, one of the provisions would require that any one-sided attorney fee provision for the benefit of the employer be construed as including a right to recover fees on the part of the employee, should he or she prevail in an action to enforce the covenant.  Sec. 20, para. (b).  This is all occurring in the context of a recent appellate opinion in Illinois which seemed to cast aside that familiar "legitimate business interests" test for enforceability.  Sunbelt Rentals, Inc. v. Ehlers, 915 N.E.2d 862 (Ill. App. Ct. 2009). 

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Cases and issues making the headlines*:

It's All Fun and Games Until... (April 1)
A man attending the Penny Arcade Expo (PAX) in Boston was reportedly arrested for allegedly stealing the code for a new game that has not yet released. The code is reported to be valued at $6,000,000. Story here.

China (April 1)
On January 23, we reported that employees of Australian company Rio Tinto Ltd had been arrested in China on charges of, among other things, trade secret misappropriation.  (Check the In the News... archives.) Rio Tinto has now reportedly hired Henry Kissenger to assist it following a conviction of one of those employees. Story here.

EMC Files Two Noncompete/Trade Secret Law Suits This Week (March 19)
Data storage giant EMC Corporation has filed two different law suits this week claiming, among other things, breach of noncompetition agreements, misappropriation of trade secrets, and violation of the Massachusetts unfair competition law (G.L. c. 93A). Story about one of the lawsuits here and here.

Trade Secret Thief Convicted (March 19)
A former DuPont Co. exmployee reportedly pled guilty to stealing DuPont's trade secrets and disclosing them to a competitor. The man, Michael Mitchell was reportedly sentenced by a federal judge in Virginia to 18 months. Story here (subscription service).

Nuclear Fusion Trade Secret Trial (updated March 16)
General Nanotechnology and certain related parties are reportedly going to trial tomorrow (March 15) in their lawsuit again Lawrence Livermore National Security, LLC and others in California. According to PR Newswire, the plaintiffs claim, among other things, that the defendants stole trade secrets and breached a nondisclosure agreement when they allegedly used the plaintiffs' nuclear fusion technology to develop their own product. Story here and here.

19 Indicted Over Computer Chip Technology Allegedly Taken to Korea (March 14)
Ten employees from Applied Materials, Inc., four from Samsung Electronics, and five from Hynix Semiconductor Inc. have reportedly been indicted in Korea for theft of computer chip technology. Story here.

Illinois Upholds Forfeiture Clause (March 14)
In a recent decision issued by the Northern District of Illinois (Viad Corp. v. Houghton), the court upheld a forfeiture clause without engaging in a traditional noncompete analysis. 

Wisconsin Continues New Approach to Noncompetes (March 14)
Following the Star Direct case (previously reported by us here), a Wisconsin Appellate Court reversed the trial court on the basis that a forfeiture provision requiring return of certain money expended for employee training could be recovered by the employer - notwithstanding that the noncompete provisions were unenforceable. Decision here. 

Astro-Med, Inc. Collects on Noncompete Case (March 14)
After a favorable jury verdict and then decision from the 1st Circuit last year, Astro-Med reportedly received $1,495,000 in its noncompete lawsuit against a former employee and his new employer. Story here and here.

Philadelphia School District Accused of Violating the CFAA, ECPA, SCA (March 14)
A Philadelphia school district allegedly provided students with laptops equipped with webcams that, unbeknownst to the students, were remotely controlled by the school district. The school district has reportedly been sued under the Computer Fraud & Abuse Act, the Electronic Communications Privacy Act, and the Stored Communications Act, among other things. Story here. 

When Noncompetes Expire... (March 14)
Noncompetition agreements are never unlimited. When they expire, the party who had been restricted is permitted to return to a competitive position. Unless there are additional restrictions (nonsolicitation agreements; no-raid/antipiracy/no-hire agreements; and/or nondisclosure agreements), the returning party is largely uninhibited in his competitive activities. Apparently, this is the plan of former advertising agency Cummins & Partner, whose noncompete will expire in early 2011. Story here.

Criminal Investigation Halts Trade Secret Lawsuit (March 14)
According to Blooberg.com (here), the Manhattan U.S. Attorney, Preet Bhara, asked the judge in the Starwood Hotels & Resorts Worldwide, Inc./Hilton Hotels Corp. trade secret case to halt the case while the U.S. Attorney investigates.

Attorney General Eric Holder Speaks About Trade Secrets (March 14)
PR Newswire reported that, on February 24, United States Attorney General Eric Holder spoke at the Rio De Janeiro Prosecutor General's Office about the need to protect intellectual property - including trade secrets. Story here.

Harvard Law Student Sues Google Buzz (March 14)
A law student has reportedly sued Google's new social networking service, Google Buzz, claiming violations of, among other things, the Computer Fraud and Abuse Act and the Stored Communications Act. Story here and here.

*For earlier stories, go to the In the News (archives) page.

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In response to the significant and growing interest in the Massachusetts noncompete reform bill, this post will aggregate links to articles and information about the bill.  It will be updated regularly, so please check back.

• Massachusetts Noncompete Bill is Reported Out of Committee
• Protecting Your Confidential Information While the Noncompete Debate Continues
• A small business perspective on non-compete agreements (text and audio)
• Mass. non-compete culture to change? (text and video)
• Marblehead rep files noncompete bill
• Marblehead rep co-sponsors overhaul of non-compete agreements
• Swampscott rep co-sponsors overhaul of non-compete agreements
• Legislators Hear Testimony on Non-Compete Restrictions
• Update on the Massachusetts Noncompete Hearings
• Massachusetts Noncompete Bill Set for Hearing
• House Bill 1799 An Act relative to Non-compete agreements

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Blogs like this (ones that are so focused on a specific area of law) may cause readers to wonder why the authors spend so much time writing about so many different aspects of the topic.  For the TSN blog, the reason is that we care.  (Nice, huh?)  Okay, but why do we care?  Simple:  the numbers. 

In doing some basic "back of the envelope" so-called "research" for a class I teach (Trade Secrets and Restrictive Covenants at Boston University School of Law), I searched Westlaw to see whether my (and others') suspicion that trade secret/noncompete litigation is on the rise is in fact true - or were we only so steeped in those types of cases that our perspective was too skewed to properly perceive reality.  The answer?  While our perspectives may indeed be skewed, the numbers confirm (in a very - and let me reemphasize - very unscientific way) that trade secret litigation is on the rise.  The chart to the right shows that from 2000 to 2009, the number of reported trade secret and/or noncompete cases more than doubled - from 1010 to 2366 - over the last decade. 

So, how does that relate to the TSN Blog?  The answer is that one of the goals of this blog has been to educate its readers about the issues and how to reverse this trend.  Indeed, that was the (I hope) plain goal of the post, "An Ounce of Prevention... ." 

All of that to say that the trend toward litigating trade secret/noncompete disputes is real and growing.  Accordingly, we urge all of you, our readers, to learn the necessary steps to insulate your trade secrets as much as reasonably possible within your corporate culture, to implement those steps, and to thereby prevent (or at least minimize the effects of) problems before they arise.  Will this eliminate all problems and all litigation?  No.  But, it will put you in the best position to avoid it and, when it can't be avoided, to respond to it quickly and effectively.

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An employer's successful lawsuit to enjoin two former highly-skilled employees from operating a competing financial services company resulted in only a one-month-long preliminary injunction -- despite proof of the employees' violation of the agreement -- because the contract did not allow an extension of the term based upon the employees' violation during the restriction period.

In Citadel Investment Group, LLC  v. Teza Technologies, LLC, the Illinois Appellate Court recently affirmed the trial judge's entry of this short-term injunction, even though the two defendants had competed in violation of the contract and had separately violated a non-solicitation agreement during the nine-month period which began in mid-February 2009.  Under Citadel's agreement, Citadel paid the two former employees tens of thousands of dollars during the non-compete period.  Specifically defendant Mikhail Malyshev received $30,000 per month and defendant Jace Kohlmeier received $21,000 monthly.

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It may soon be a lot easier to enforce noncompete/nonsolicitation agreements in Georgia.  Late last week the Georgia House Judiciary Committee passed a resolution to amend the Georgia Constitution to allow the General Assembly to pass laws governing competitive activities between employee and employer, distributors and manufacturers, franchisors and franchisees and others.   The need to protect company investments in people drove the change, as did the confusing case law on the subject.   The proposed amendment would also allow the Assembly to pass laws which would permit courts to limit the duration, scope and geographic area of such contracts.  In other words, courts would be permitted to rewrite the contracts to make them reasonable.

The Judiciary Committee resolution is not yet the law.  It still needs the approval of the full House, the Senate, the Governor and the voters this fall.  According to the local press, there appears to be a lot of support for the resolution.  See Fulton County Daily Report, February 12, 2010.

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Cases and issues making the headlines*:

More Noncompetes and Celebrities (January 25)
CBS’s radio morning personality in DC, Donnie Simpson, is reportedly leaving CBS. According to the story in the Washington Post (here), Simpson will be prevented from joining a competitive station for 13 and ½ months as a result of a noncompete agreement with CBS.

Fashion and the Computer Fraud & Abuse Act (January 25)
Magazine publisher Conde Nast is reportedly pursuing information from third-party providers about unknown individuals who have allegedly improperly used other people’s usernames and passwords to access and obtain files from Conde Nast’s computers. Story here.

China Prosecuting Alleged Trade Secret Theft (January 23)
Chinese police have reportedly arrested four employees of Australian company Rio Tinto Ltd on charges of, among other things, trade secret infringement. Story here.

Cloud Computing and the CFAA – a Call to Arms (January 23)
As more people are cloud computing, Microsoft has reportedly called on the federal government to “modernize the laws” (including the Computer Fraud and Abuse Act) to ensure greater security. Stories here, here, and here.

Trade Secret Settlement (January 23)
The trade secret lawsuit between semiconductor competitors, Applied Materials Inc. and Advanced Micro-Fabrication Equipment Inc. (founded by former Apple employees), has reportedly been settled. Story here (paid subscription).

MA Noncompete Bill (January 23)
The Massachusetts Bar Association will be holding a roundtable on the proposed MA Noncompete legislation. Speakers are the bill’s sponsors, State Representative Lori Ehrlich and State Representative Will Brownsberger; lawyer and lead author/advisor on the bill, Russell Beck, and lawyer Andrea Kramer. Information here.

Conan O’Brien’s Noncompete Resolved (January 23)
Almost as quickly as it started, Conan O’Brien is reportedly leaving The Tonight Show and, as a result of a noncompete agreement, off the air until September 2010. Of course, he did reportedly receive $45 million for the trouble – of which he is said to be giving $12 million to his staff. Stories here, here, and here. 

The Muffin Man (or Woman) and Trade Secrets (January 23)
Bimbo Bakeries USA Inc. has reportedly sued a former executive who left for competitor Hostess Brands Inc. The case was brought in Pennsylvania and seems to rely on the inevitable disclosure doctrine as the basis for a request to enjoin the former executive – who is supposedly one of the few people in the world who knows the recipe for Thomas’ English Muffins. Story here (paid subscription).

No Heart When it Comes to Trade Secrets (January 23)
Berkeley Heartlab Inc. has reportedly filed a lawsuit alleging trade secret misappropriation (among other things) by its former employees and their new employer. Story here (paid subscription).

Motorola Sues Former Exec (January 23)
Motorola has reportedly sued a former executive who left to join Nokia. The reported basis for the lawsuit is the protection of Motorola’s trade secrets. Story here.

Foley’s 5 Part Trade Secret Series (January 23)
Foley & Lardner’s Trade Secret / Noncompete Practice just completed a 5-part web conference series on trade secret protection. The series will be available here. Each part is a “stand alone” topic, but all 5 combine together for a comprehensive overview of trade secret / noncompete issues. Enjoy!

Noncompetes and Newscasters (January 3)
In a recent example of noncompetes applied in the broadcast industry, former ABC News correspondent Jan Crawford was reportedly prevented, until now, from joining “Face the Nation with Bob Schieffer.” Story here and Ms. Crawfod’s initial blog post for CBS News here.

Communion and Trade Secrets (January 3)
A manufacturer of a “‘rapidly reloading’ communion host dispenser” is reported to have sued a former employee, claiming that the employee is unlawfully using the company’s trade secrets to make a competitive communion host dispenser. Story here and here.

Trade Secret Misappropriation without the Trade Secrets (January 3)
The Court of Appeals of California, reversing a decision by a trial court, permitted a party who no longer possessed a trade secret to continue its lawsuit against the party who had allegedly misappropriated the trade secret. Court of Appeals decision here.

35 Years of Trade Secret Theft (January 3)
A former plan manager of a manufacturing company was reportedly accused of having stolen trade secrets from his former employer over the course of 35 years and providing the stolen trade secrets to a company in India.

CFAA Used for Original Purpose (January 3)
The Computer Fraud and Abuse Act, which was originally designed to target computer hackers, was subsequently amended to reach well beyond its original purpose. Recently, however, a publisher reportedly sued unknown hackers for allegedly hacking into the publisher’s computers and posting articles online before the publisher published them. Story here and here.

*For earlier stories, go to the In the News (archives) page.

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A common debate in noncompete drafting circles is whether to define the prescribed "business" or refer to the "business being conducted by the Company," or words to that effect. In a nutshell, those in favor of defining the business tend to believe that instructing the employee (and eventually the court) with specificity as to which lines of business are within the scope of the noncompete is preferable, whereas the folks choosing to refer to the "business being conducted by the Company" may be concerned that defining the business specifically may preclude application of a noncompete to new product lines that emerge following the execution of the noncompete.

Drafting decisions made on this issue can have far-ranging effects, causing the trier of fact to determine what a competing business is. Note the case of Luminar Laval Ignite Limited v. Mama Group PLC and Mean Fiddler Holdings Limited, in the First Division, Inner House, Court of Session in Edinburgh, Scotland (http://www.scotcourts.gov.uk/opinions/2010CSIH01.html), which involves a noncompete in which a music venue was sold by one group to another. The selling group operated a nearby music venue and, in the purchase and sale agreement, restricted the purchasing group from operating a music venue that engages in "late night entertainment in direct competition on a like for like basis with the discotheque business" of the selling group, although the purchasing group was specifically permitted to operate the purchase property "as live music venue, or a bar at which music is played."

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A great deal of discussion has taken place in the legal press recently about the use of the Computer Fraud and Abuse Act as a cause of action against those who take with them information from their former employers for use in subsequent competitive activities.  And rightly so, given the explosion in the number of civil claims brought pursuant to the statute in recent months.  Much less discussion has been heard, however, about a long-recognized cause of action - breach of the duty of loyalty - that can be a crucial component of a well-thought-out attack against the misuse of confidential information by a former employee and his/her new employer.  The importance of this cause of action was highlighted in a recent decision of the Wisconsin Court of Appeals, InfoCorp, LLC v. Hunt, Case No. 2007AP2887, 2009 WL 4800140 (Wis. Ct. App. Dec. 8, 2009).

InfoCorp, LLC (d/b/a "InfoCor") is a reseller of so-called "SMART Boards," interactive whiteboards that combine the functions of an overhead projector, computer projector and a chalkboard.  Hunt started work at InfoCor in 2005.  Before that, he worked for 2 InfoCor competitors selling the same product and had developed a particularly strong relationship with a customer ("CESA 2") that, among other things had a cooperative purchasing program representing a number of Wisconsin school districts.  Hunt was employed by InfoCor for a year.  During that time, CESA 2 entered into an agreement with the manufacturer of the SMART Boards to purchase its products at reduced prices and InfoCor was the only reseller authorized by CESA 2 to provide those products to its member school districts.

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Cases and issues making the headlines*:

Trade Secret Verdict (December 22)
We previously reported on the Nova Biomedical Corporation trade secret litigation in “In the News…“.  The case has now gone to trial, with Nova Biomedical reportedly obtaining a verdict in its favor. Story here.

Inevitable Disclosure Doctrine (December 22)
A former Alltel Corp. employee hired by Allied Wireless Communication Corp. as its new CIO, was reportedly sued by Verizon (which had acquired Alltel) under the Arkansas Trade Secret Act.  Verizon reportedly asserts that the former employee will inevitably use and disclose confidential information and trade secrets in his new position. Story here.

Pleading Your Case (December 22)
In Bank of America N.A. v. UMB Financial Services Inc., 4:09-cv-00574 (W.D. MO), the United States District Court Judge reviewed under the new Iqbal  and Twombly standards – and found satisfactory – a complaint for, among other things, violation of a non-solicitation agreement. Story here (paid subscription).

Crimes and Punishment (December 20)
Protection of trade secrets through the criminal justice system comes to the attention of the media every now and again.  Here are some recent ones:

• A 35 year old web developer was charged with theft of trade secrets (and wire fraud) relating to how to make his former employer’s web site operate quickly and effectively.  If convicted, he will face 20 years in prison.  Story here and here.
• A former executive pleaded guilty to selling The Home Depot Inc.’s trade secrets to a vendor to give the vendor a competitive advantage over other vendors.  Story here and here. 
• A former Intel Corp. engineer, working for Advanced Micro Devices Inc., was charged with stealing trade secrets valued at $1 billion.  Story here.

Faceoff (December 20)
Facebook continues its quest against improper use of its network, including a recently-filed action against certain alleged high profile hijackers and spammers.  Story here, here, and here.

Employee Hacking (December 20)
Advertising startup Yodle, Inc. accuses former employees, now at alleged competitor, WebVisible, of stealing trade secrets through use of old usernames and passwords.  Story here.

Public Records or Trade Secrets? (December 20)
An appeals court in Iowa affirmed an order that the state’s Department of Transportation release – in response to a public records act request – documents claimed by the filer to be trade secrets. The order requires that the documents be provided to the filer’s competitor. Story here. 

Physician Noncomeptes (December 20)
In some states, physician noncompetes are unenforceable.  In other states, they are as permissible as any other noncompete. The Montana Supreme Court has recently ruled that the enforceability of physician noncompetes depend on whether a jury finds them to be fair. Story here. 

Equitable Tolling Rejected In Utah (December 20)
In some states, the term of a noncompete may be extended to offset the time that the former employee has violated the agreement. In Utah, however, that principle has just been rejected. Story here.

Trade Secrets in Construction (December 20)
Construction information provider, Reed Construction Data, reportedly amended a lawsuit against McGraw-hill Construction Dodge to allege misappropriation of trade secrets through, among other things, the use of companies to pose as fake customers to thereby obtain confidential information.  Story here.

“Instant-On” Case is On (December 20)
Phoenix Technologies Ltd. has reportedly been permitted to continue its trade secrets lawsuit against DeviceVM over alleged misappropriation of “instant-on” software. Story here and here.

Is Justice Delayed Justice Denied? (December 20)
After more than a decade of legal wrangling, a plaintiff in a trade secret dispute has reportedly been awarded almost $300,000. Story here.

Where to Shop? (December 20)
eBay and Craigslist square off over claims of trade secret misappropriation. Story here, here, and here.

*For earlier stories, go to the In the News (archives) page.

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Cases and issues making the headlines*:

Trade Secret Misappropriation Enjoined in California (November 20)
A former high-level engineer at Pacestter in California left to form a rival company, Nervicon, in China, which ordered a 24 MHz surface mount crystal oscillator from one of Pacesetter’s suppliers. The supplier allegedly recognized the order as using Pacesetter’s information and contacted Pacesetter, which sued for, among other things, misappropriation of trade secrets, unfair competition, and breach of fiduciary duty. Pacesetter sought and received a preliminary injunction. The case is Pacesetter Inc. v. Nervicon Co. Ltd., BC424443, California Superior Court, LA County. Story here (paid service).

New Less Onerous Noncompete Valid (November 20)
An Oregon court upheld a noncompete entered, effectively (although not technically), mid-employment. Although such agreements are ordinarily not enforced, the court found that the agreement was less onerous than the pre-existing noncompete, and therefore the protections afforded by Oregon’s noncompete statute were satisfied. The case is Epiq Class Action and Claims Solution Inc. v. James R. Prutsman and Rust Consulting Inc., case number 09-1185, in the U.S. District Court for the District of Oregon.  Story here (paid service).

Idaho Trade Secret/Raiding Case Seeks $10,000,000 (November 19)
Idaho health and home products company Melaleuca Inc. has reportedly sued Utah company, Max International, of corporate raiding, trade secret misappropriation, and unfair competition, seeking not only injunctive relief, but $10,000,000 in damages.  Story here. 

Trade Secret Lawsuit Not An Abuse of Process (November 19)
Restaurant supplier Lasco Foods Inc.’s trade secret action overcame a challenge that it was brought in bad faith (as an abuse of the legal process).  That claim, and the claims under the Computer Fraud and Abuse Act and the Stored Wire and Electronic Communications Act among others, will reportedly proceed against startup,  Hall & Shaw Sales, Marketing & Consulting LLC.  Story here (paid service).

From Patents to Trade Secrets (November 14, 2009)
On November 9, the United States Supreme Court heard arguments in the Bilski case, which concerns the use of “business-methods patents” (i.e., patents to protect methods of performing certain activities).  Story here.  Based on the Court’s reaction, it seems likely that these patents will no longer be generally available, leaving the secret business methods to secure their protection through trade secret laws. 

There’s an App for That? (November 14, 2009)
A computer game developer has been sued for violation of the Computer Fraud and Abuse Act by allegedly collecting personal data through an iPhone app.  Story here and here.

Music to No One’s Ears (November 14, 2009)
Musicians in the Sarasota Orchestra were allegedly prohibited from performing at a concert because of a noncompete clause in a collective bargaining agreement.  Story here and here. 

Recent Articles and News From the Authors (November 14, 2009)
In case you missed them, we will now be linking to recent published articles written by Foley & Lardner’s trade secret / noncompete lawyers and other stories quoting our authors.  Here are the latest:  No-poach agreements: A new generation of restrictions (Computerworld); A practical approach to protecting trade secrets (CIO.com and Macworld); Protecting Your Confidential Business Information While the Noncompete Debate Continues (Foley Newsletter); Mass. non-compete culture to change? (NECN); Marblehead rep co-sponsors overhaul of non-compete agreements (Marblehead Report/Wickedlocal.com); @russellbesq at 22 Tweets (Twitter).

Really? (November 14, 2009)
A recently-filed lawsuit accuses actress Sara Jessica Parker of stealing trade secrets and selling them to Apple’s Steve Jobs, ultimately leading to the development of the iPod.  Story here and here. 

Read On… (November 14, 2009)
Spring Design sued Barnes & Noble, claiming that Barnes & Noble copied its design for a two-screen e-book reader.  Story here. 

Secret Product Placement (November 14, 2009)
Not quite subliminal advertising, but Denizen LLC has reportedly sued MindShare Entertainment for stealing its product placement ideas involving the integration of product placements in television shows.  Story here.

*For earlier stories, go to the In the News (archives) page.

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The Georgia Supreme Court recently narrowed the scope of a noncompete injunction prohibiting a former employee of a retina surgery practice from marketing certain software in competition with his ex-employer.  Coleman et al. v. Retina Consultants PC et al. (GA S. Ct.).

Prior to his employment by The Retina Eye Center ("TREC"), Coleman -- a software engineer -- wrote and marketed a medical billing program called Clinex. While at TREC, he tailored the program to suit that company's business and developed a separate retinal practice application, Clinex-RE.  As the lower court found, it is undisputed that Coleman incorporated TREC's proprietary information and trade secrets in developing Clinex-RE, and that Clinex-RE only operates in conjunction with Clinex. The parties allocated the rights to Clinex and Clinex-RE in a software agreement that also restricted Coleman's ability to distribute the Clinex software or any applications competitive with Clinex-RE to ophthalmologists or optometrists without TREC's consent.

Following his resignation from TREC, Coleman attempted to distribute or license the Clinex and Clinex-RE software to other ophthalmologists; he refused to disclose to TREC necessary passwords to read and revise copies of the software; and  he used or attempted to use TREC's proprietary information and trade secrets to compete with a company owned by Coleman and TREC that was formed to market Clinex and Cline-RE.

TREC brought suit for breach of contract and moved for an injunction to enforce the software agreement's noncompete provision, and to enjoin Coleman from retaining and using access codes, source codes, other information, and passwords required to read and revise copies of Clinex and Clinex-RE.

Finding the lower court improperly enforced the noncompete clause at issue as it is unenforceable as a matter of law because of the failure to specify a time limitation, the Supreme Court nonetheless held that the former employee could be prohibited from marketing Clinex and Clinex-RE together because -- as the trial court determined -- Clinex-RE includes proprietary information and trade secrets.  Coleman would not, however, be restricted from using and marketing his own version of Clinex as that software is his own property.

Further, the Supreme Court ruled that the injunction preventing Coleman from retaining any and all information and documentation related to Clinex was too broad and went beyond the scope required by the software agreement as it would foreclose him from access to information related to his own software to which he is entitled.

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Hot off the presses. Spring Design, Inc. has filed an action against Barnesandnoble.com LLC, in the Northern District of California, alleging that Barnes and Noble breached a non-disclosure Agreement with Spring Design and misappropriated trade secrets related to Barnes & Noble's development of an electronic book reader device.

Click here for a copy of the Complaint that was filed on Nov. 2, 2009: Spring Design, Inc. v. Barnesandnoble.com LLC Complaint.

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Cases and issues making the headlines*:

Cool Beans (October 24)
As is frequently the case in noncompete disputes, Starbucks has resolved its dispute with its executive, who left to join Dunkin’ Donuts allegedly in violation of his noncompete agreement.  Story here.

2^nd Circuit Affirms Unenforceability of Noncompete Signed in Wrong Place (October 24)
Several months ago, an IBM senior executive, David Johnson, left to go to Dell.  IBM sued, claiming Johnson violated his noncompete agreement. Johnson defended, in part, by pointing out that the agreement was not properly executed.  He won.  After more wrangling in the district court, IBM appealed.  The 2nd Circuit, however, affirmed the district court’s decision.  Story here.

Trade Secret Theft Results in Criminal Charges (October 16)
A former Ford product engineer was reportedly indicted for theft of trade secrets, attempted theft of trade secrets and unauthorized access to a protected computer.  Story here.

Time to Smell the Coffee (October 12)
The battle between Starbucks and Dunkin’ Donuts has expanded from personal taste to the courtroom.  Starbucks has reportedly sued a former executive for joining Dunkin’ Donuts allegedly in violation of his noncompete agreement.  Stories here and here.

Computer Fraud and Abuse Act Used to Attack Spam (October 12)
Craigslist has reportedly filed suit against alleged spammers, relying on the Computer Fraud and Abuse Act. Story here.

Yogurt Trade Secret Case Going to Trial in NH (October 10)
According to reports, Agro-Farma Inc. sued Stonyfield Farm Inc. for, among other things, misappropriation of trade secrets, specifically, aspects of the manufacturing process for a certain type of yogurt. While manufacturing processes fall squarely within the definition of a trade secret, it is rare for such cases to make it all the way to trial.  Nevertheless, the case has been scheduled for trial on the trade secret claim (as well as other claims and counterclaims). Story here.

Continued Hearings in Citadel/Teza Case (October 10)
As covered several months ago in In the News…, hedge fund manager Citadel Investment Group LLC sued a competing hedge fund company and its founder, alleging, among other things, a violation of the founder’s noncompete agreement. The lawsuit was filed on the heels of reports that one of Teza’s employees had been arrested for allegedly stealing secret trading software from Goldman Sachs. The lawsuit now continues with hearings on the alleged destruction of evidence.  See Former Citadel Executive Denies Deliberately Erasing Evidence (on Bloomberg.com) and Citadel Calls Former Head of HFT Trading’s Current Venture, “A Veritable Pirate Ship of Illegal Activity.”

NECN Story on MA Noncompete Bill (October 9)
NECN reporter Peter Howe reported on the noncompete debate in Massachuestts.  Story, including video, here.

Balancing Trade Secrets and Discovery (October 2)
The Texas Supreme Court holds that it was an abuse of the trial court’s discretion to order the disclosure of trade secrets (rates charged for certain hazardous materials and the methods for their calculation) when the plaintiff could not prove why it needed the information.  Story here.

*For earlier stories, go to the In the News (archives) page.

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Yesterday, October 7, the Massachusetts legislature's Joint Committee on Labor and Workforce Development took testimony on the two pending bills to reform Massachusetts noncompete law: one to ban noncompetes (House Bill 1794) and the other (House Bill 1799) to codify, clarify, and improve the existing complicated and unpredictable common law in this area.

The testimony began with the two state representatives, Lori Ehrlich and Will Brownsberger, who had each sponsored one of the two bills (Rep Ehrlich sponsored H.1799 and Rep. Brownsberger sponsored H.1794).  They explained that while, technically, the original two bills were up for consideration, they had been working together on a new "compromise" bill, which they are now sponsoring together.   The representatives then explained the need for and goals of the new bill and laid the groundwork for the ensuing testimony.

I spoke next.  After providing background of my qualifications for the role I played in connection with the bill (i.e., I was the lead drafter and advisor), I explained the current law and its problems; summarized key provisions of the new bill and how the bill addresses many of the problems with the current law; and explained how the bill sought to balance the interests of the employers against the needs of the employees.  In an effort to explain why the bill addresses certain issues and not others, I reminded the committee that the bill takes on almost 200 years of Massachusetts noncompete jurisprudence - which is no easy task.  To do more would have added substantially to an already lengthy bill, which as written codifies, clarifies, and modernizes current law; addresses the most pressing open issues in the current law; and provides much needed predictability for employers and employees alike.

Rob Mantell, who represents only employees (not employers), spoke next, and focused on the original bill to prohibit noncompetes (H.1794), although he also expressed support for the compromise bill.  Most of the rest of the testimony focused primarily on the witness's position for or against the use of noncompetes.  In addition, many of the "usual suspects" were there, including Professor Matt Marx, who provided information about how noncompetes are used in practice, and Bijan Sabet, who spoke eloquently from the perspective of venture capitalists opposed to the use of noncompetes.

From a personal perspective, as I listened to the testimony, what came through was that reform was well overdue and that the balance achieved by the bill was correct.

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Settled Illinois law regarding the requirements for an enforceable post-employment non-competition agreement were discarded by a September 23 opinion of the Illinois Appellate Court (4th District) which would make any non-compete enforceable so long as its duration and scope are reasonable even in the absence of a long-standing customer relationship or access to confidential information.

In Sunbelt Rentals, Inc. v. Ehlers, No. 4-09-0290 (4th Dist.), the Illinois Fourth District Appellate Court (one of five appellate courts in Illinois) rejected decades of state-wide appellate court precedent applying the so-called "Legitimate Interest Test,"  by holding that an employer need not establish a legitimate interest (either long-standing customer relationship or confidential information) to enforce a post-employment non-compete.

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Cases and issues making the headlines*:

Mass Defections Frowned Upon (September 30)
It’s no surprise that courts frown upon coordinated mass resignations, timed to enable the group of departing employees to take the maximum advantage of the disruption caused by their departure.  And, yet, people still do it.  The latest here (paid service).

Be Careful Who You Get Into Bed With(September 30)
Companies share trade secrets in a variety of contexts: joint ventures, mergers, acquisitions, consulting relationships, and others.  Sometimes, however, after obtaining access, one party decides to use the secrets for its own purposes, often times competitive with the other party.  Law360 has reported on a recently-filed case alleging just that.  Story here (paid service).

When Noncompetes Expire… (September 22)
While most companies view noncompetition agreements as preventing their former employees from working for competitors, the risk – especially with well-heeled executives who have sold their business – is not so limited.  According to the Miami Herald, after selling his prior HMO, entrepreneur Mike Fernandez is planning to start another HMO at the expiration of his 5 year noncompete.  Story here.

CEOs and Trade Secrets (September 19)
The former chairman and CEO of Joost was sued for allegedly using trade secrets obtained by him while CEO and which enabled him to participate in acquisition of Skype.  Story here and here.

Malvertising and the Computer Fraud and Abuse Act (September 19)
Microsoft has filed a lawsuit alleging that certain companies hid malicious code in what appeared to be harmless online advertisements.  Microsoft claims that this and related conduct constitutes, among other things, a violation of the Computer Fraud and Abuse Act.  Story here and on Microsoft’s blog as “Bad Ad: Going After The Malvertising Threat.”

More Allegations of Chinese Nationals’ Theft of Trade Secrets (September 19)
DuPont reportedly sued a Chinese research scientist for misappropriating trade secrets for use in developing competitive products in China.  Story here.

More on California Court’s Take on the Computer Fraud and Abuse Act (September 19)
Below (“Employee Access to Computers and the Computer Fraud and Abuse Act”), we noted the recent 9^th Circuit’s recent ruling on whether employee’s “disloyal” access to his employer’s computer can violate the Computer Abuse and Abuse Act.  Here are more stories:  On Wired.com: “Court: Disloyal Computing Is Not Illegal” and on ars technical: “Disloyal employees are not hackers, says court.”

Trade Secrets Meet Public Records Act (September 17)
The Ohio Supreme Court has ruled that standardized tests are trade secrets, and therefore exempt from disclosure under the public records act.  Story here.

Noncompetes in the Financial Services Industry Are Alive and Well (September 17)
Lest you hear that noncompetes are no longer used in the financial services industry, don’t believe it.  Here’s the latest case to roll through the system:here.

Computer Fraud and Abuse Act Used Against Labor Union (September 17)
After allegedly being inundated with emails and telephone calls, a company has sued the labor union it claims orchestrated the infiltration of emails and calls, claiming that the conduct violates, among other things, the Computer Fraud and Abuse Act.  Story here and here.

Employee Access to Computers and the Computer Fraud and Abuse Act (September 17)
In the continuing development of the law governing whether an employee’s access of his employer’s computer for improper purposes is “unauthorized access” to the computer prohibited by the Computer Fraud and Abuse Act, the 9^th Circuit holds that it is not.  Story here.

Customer-Based Restrictions Substitute for Geographic Limit (September 17)
A Texas court was persuaded that restrictions in a noncompete agreement on which customers a former employee may solicit was a sufficient substitute for otherwise-required geographic limitations.  Story here.

It’s All Fun and Games Until… (September 17)
Two game development companies are in a dispute concerning whether one company’s employees defected to the other with trade secrets.  Story here.

*For earlier stories, go to the In the News (archives) page.

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On October 7, the Massachusetts legislature's Joint Committee on Labor and Workforce Development will conduct a hearing on the two noncompete bills sponsored, respectively, by Representatives Lori Ehrlich and Will Brownsberger. While those two bills are technically before the Committee, there is a third bill that reflects a joint effort by the two legislators, which is likely to be the focus of the hearing. The representatives initially made a draft available for public comment in July. Since then, there have been many meetings, emails, and other communications providing input on the draft. We have made an effort to consider them all in drafting the revisions to the July version. We also made an effort to structure the bill in as straightforward a manner as possible, given the complicated nature of the issues and the many interests to be balanced. As before, we have striven to achieve an appropriate balance of protections and incentives to both employers and employees, and make it easier for both sides to predict the outcome of any potential dispute, thereby reducing the need to resort to the courts for resolution of such disputes. The current draft (including changes through September 28) is available here.

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When an employment relationship terminates -- regardless of who instigated the termination -- both employer and employee should consider the potential issues that could arise if the employee goes into competition with the employer.  The employer needs to minimize the risk that the departing employee will take its customers or trade secrets, while the employee needs to minimize the risk that her old employer will attempt to block her new employment.  The following are steps that each party should consider.

Employees.  To protect her future employment, a departing employee should not take any company information or property -- regardless of how insignificant it may seem.   Nor should she do anything that makes it look like she took something.  Downloading a bunch of material from the company's computer and then deleting it is one sure way to raise suspicion -- even if it was as innocent as transferring personal photos and contact information.  It looks even worse if the material so taken is work-related.  The employee may have simply wanted a keepsake of that project he spent so much time on, but from the employer's perspective it looks like theft.  Employees need to remember that the work they did belongs to the employer, and to leave it all behind.

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We are pleased to announce a free five part web series entitled, "Trade Secrets and Noncompete Agreements: What You Need to Know."  The series covers the topics below.  For more information please click here or visit Foley.com.  To register, click here. 
 

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Cases and issues making the headlines*:

Computer Fraud and Abuse Act Not Violated by Exceeding Access of Terms of Use (August 30)
The United States District Court for the Middle District of Californiarejected application of the Computer and Abuse Act  in the so-called "cyberbullying case."  The court held that exceeding a website's terms of use does not constitute exceeding authority for purposes of a criminal cause of action under the statute.  Story (with a link to the court's decision) here.

Noncompetes Beverly Hills Style (August 23)
Internet advertising company Hydra LLC of Beverly Hills is reportedly in the middle of an internal rift that has divided the company.  Reports indicate that claims of breach of noncompete obligations have been met with claims of corporate waste, which have in turn been met with claims of defamation.  Story at Los Angeles Business Journal, Internet Execs Failed to Click.

Competitor's Alleged Use of False Emails Leads to Lawsuit (August 22)
Affiliated Computer Services, Inc. (AFC) brought a federal lawsuit against competitor Duncan Solutions, Inc., alleging that Duncan Solutions created dozens of false email accounts by which it was able to access AFC's computers, divert emails intended for other people, and misappropriate trade secrets and other confidential business information.  The lawsuit makes claims under the Computer Fraud and Abuse Act (18 U.S.C. § 1030), the Stored Wire and Electronic Communications and Transactional Records Access Act (18 U.S.C. § 2701), and the Federal Wiretapping Act (18 U.S.C. § 2511).  Story here.

The First Amendment vs. Trade Secret Protection (August 21)
The Pittsburgh Post-Gazette was sued in West Virginia by generic drugmaker Mylan Inc.  The suit claims (among other things) that the newspaper misappropriated trade secrets concerning manufacturing and quality control processes.  Although not discussed in the story (here), the case will likely turn on the relationship between the First Amendment rights held by the newspaper and the law of trade secret protection.

Public Information and Customer Lists Can Be Trade Secrets (updated August 21)
The 10th Circuit (analyzing Colorado law, which is similar in relevant part to the majority of states) held that a compilation of information, each, component part of which is publically available, can be a trade secret.  The court also held that customer lists can be trade secrets.  The case is Hertz v. Luzenac Group, and is discussed here (paid service) and here.  The California Court of Appeal explains (also consistent with the prevailing view) that courts are reluctant to protect "naked" customer lists (i.e., those lists that contain merely names and addresses) as opposed to those that contain the particular needs and characteristics of the customer.  The case is The Retirement Group v. Galante.

No Noncompete, No Problem (Updated August 20)
While noncompete agreements are verboten in California, some companies have reportedly managed to find a way to obtain some of the benefits of such agreements:  an unspoken agreement to not poach each other's employees.  Story here, here, and here (new).

The Value of Trade Secrets (August 17)
Cumberland Pharmaceuticals Inc., which had its IPO last week, relies on trade secrets (rather than patents) to protect its technology.  Story here.

Social Network Site Tagged with Lawsuit (updated August 15)
The social network site Tagged.com was sued in California.  The case asserts that Tagged harvested emails in violation of, among other things, the Computer Fraud and Abuse Act.  Story here, here, and here.

Massachusetts Noncompete Debate - Scott Kirsner's Latest (August 14)
People fall on all sides of the current debate about whether and, if so, how to change Massachusetts's noncompete laws.  Boston Globe columnist and blogger, Scott Kirsner, strongly supports Massachusetts following the California model of prohibiting employee noncompete agreements.  Mr. Kirsner's latest posting is here.

Twitter’s Tweets Silenced  (August 6)
For those who may have been wondering what was happening with Twitter today, the answer is that it was allegedly shut down this morning by a DDoS hacker attack.  (Story here and here.)  Computer Fraud and Abuse Act lawsuit next?

Huron Consulting’s Battle with Sonnenschein, Nath & Rosenthal (August 4)
In June, Huron Consulting sued several former employees for (among other things) allegedly breaching their noncompete and non-solicitation agreements and law firm, Sonnenschein, Nath & Rosenthal, for allegedly tortiously interfering with those contracts.  The battle has heated up this month with assertions by the defendants of wrongdoing by Huron and arguments that the agreements are unenforceable under Illinios law.  Story here.

Big Brother vs. the Computer Fraud and Abuse Act (updated August 3)
A putative class action lawsuit has been filed by two named plaintiffs against Amazon.com alleging that Amazon wrongfully deleted (remotely) from the plaintiffs’ Kindles (e-book readers) copies of books that Amazon had sold to them.  Filed in the United States District Court for the Western District of Washington at Seattle, the case is Gawronski v. Amazon.com, Inc. According to the complaint, Amazon deleted the books because, after selling them, it discovered that it did not have the proper authorization from the copyright owner.  The complaint alleges that Amazon’s remote access into the plaintiffs’ Kindles was unauthorized, and as such, violates (among other things) the Computer Fraud and Abuse Act, 18 U.S.C. § 1030.  The complaint (paragraph 4) provides the following colorful analogy:

And consider noted New York Times technology writer, David Pogue’s description of Amazon’s conduct: “[I]t’s like Barnes & Noble sneaking into our homes in the middle of the night, taking some books that we’ve been reading off our nightstands, and leaving us a check on the coffee table.”

Although things like this have allegedly happened before, the irony here is that one of the books is George Orwell’s 1984.

Additional information (including a discussion of impact on one of the plaintiffs, who had made notations (now allegedly useless) throughout the book for purposes of a student thesis) is available at My Amazon Kindle Ate My Homework; WSJ Blog post, Lawsuit: Amazon Ate My Homework; and the L.A. Times Business Technology story, Highlights from the ‘1984′ lawsuit against Amazon.  PC Magazine has also posted a story (which includes Amazon’s response): Kindle Users Sue Amazon Over Deleted Orwell Book.

The Intersection of Trade Secrets and Freedom of Information (August 1)
Requests to the federal government for “public records” are made through a request under the Freedom of Information Act.  Requests to state governments are typically made through state analogues.  There is little dispute that trade secrets are exempt from disclosure under these acts.  Rather, the dispute generally concerns whether the particular information (typically required to be filed with the government) qualifies as a trade secret.  See for example Fox’s efforts to obtain bail-out documents here.

Trade Secret Theft: Rising Risks (August 1)
USA Today report on the rise and risks of trade secret theft here.

BoA Sues Departing Employees (Missouri) (August 1)
Bank of America reportedly sued five former employees for breaching their noncompete agreements by joining competitior UMB Financial Corp. and soliciting their former clients.  Story here.

Smith & Nephew Sues Competitor (Tennessee) (August 1)
Smith & Nephew, Inc. has reportedly sued a former sales person and his new employer, Osteologic, Inc., for violating the employee’s noncompete agreement.  Story here.

More Noncompetes Expiring… (August 1)
With his noncompete having recently expired, the founder of Hotels.com has launched GetARoom.com.  The method used by the new website for getting a good rate on a hotel: a phone call!  What’s the world coming to?!  Story here.

Cybercrime Prosecutions (August 1)
NPR’s take on cybercrime prosecution after the first cybercrime indictment, twenty years ago, here.

*For earlier stories, go to the In the News (archives) page.

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In trade secret disputes, a company seeking to prevent a former employee from going to work for a competitor (or creating a new company that will be a competitor) often invokes the so-called doctrine of "inevitable disclosure."  In essence, an inevitable disclosure claim rests on the premise that because of the nature of the industry, the competitive positions of the former and current employers, the similarity of the employee's position with the former and current employers, and various other factors, it is inevitable that the employee will use the trade secrets of the former employer in his/her new position "unless [he] possesse[s] an uncanny ability to compartmentalize information."  PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269 (7th Cir. 1995).  

Inevitable disclosure claims are not new.  Reported cases go back at least to the mid-1960s.  See, e.g., Allis-Chalmers Mfg. Co. v. Cont'l Aviation & Eng'g Corp., 255 F. Supp. 645, 654 (E.D. Mich. 1966) (finding an "inevitable and imminent danger" that engineer would disclose pump design to competitor, and "virtual impossibility" that he could work for competitor without disclosing trade secrets, as sufficient to justify injunction against working on pump product line for competitor).  

The doctrine gained new momentum, however, under the Uniform Trade Secrets Act ("UTSA"), which expressly protects against "threatened" as well as actual misappropriation.  The leading case applying the inevitable disclosure doctrine under the UTSA is PepsiCo.  In that case, PepsiCo and Quaker (Snapple) were competitors in the "New Age" drink business, and the defendant, Redmond, was a high-ranking marketing executive with PepsiCo who left to take a similar position with Quaker.  The lower court found, and it was not challenged on appeal, that strategic plans, pricing architecture, and marketing agreements with retailers were "trade secrets."  The court concluded that where the executive would be making strategic decisions for a direct competitor, it is inevitable that his decisions would be informed by his prior employer's trade secrets of this nature.  Based on that reasoning, the court enjoined the executive from accepting a position with the competitor for six months.   

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Sometimes as a discussion progresses, the details become obscured or lost altogether.  The discussions about noncompete agreements are no exception.  So, below are some definitions with which people should be familiar:

Common Types of Agreements:

• Restrictive covenant:  An agreement that limits a party's ability to perform similar work.  Generally, people think of the limits as applying after the parties' relationship ends, but typically the restrictions apply during the term of the contract as well.  (The reason for the post-contract focus is that the parties' interests are more likely to diverge at that point.)
• Noncompete agreement (also known as "noncompetition agreements"):  A type of restrictive covenant in which the applicable limitation precludes a party from providing services to a competitor of the other party.  These agreements can arise in many contexts (sale of a business, independent contractor agreements, partnerships, etc.), but most often arise in the employment context.  (Those that arise in the employment context are commonly referred to as "employee noncompete agreements.")
• Garden leave clause:  a type of employee noncompete agreement for which the employer compensates the employee while the employee is restricted from competitive activities.  There are two types: one in which employment continues during the restricted period (essentially the employee is required to provide a minimum amount of notice of resignation); one in which the employment terminates and the restrictive period begins.  For more on the garden leave clause, see Christi Adams' post, Garden Leaves.
• Forfeiture-for-competition agreement:  a form of employee noncompete agreement by which an employee forfeits certain benefits if he engages in activities that are competitive with his former employer.
• Compensation-for-competition agreement:  a form of employee noncompete agreement by which an employee pays his former employer (sometimes a percentage of the revenues from the competitive activities) if he engages in activities that are competitive with his former employer.  (This agreement can be viewed as a form of forfeiture-for-competition agreement, insofar as the employee forfeits some of the compensation for competitive activities.)
• Forfeiture agreement:  an agreement by which an employee forfeits benefits when his employment terminates - regardless of whether he engages in competitive activities.
• Nondisclosure/confidentiality agreement:  an agreement by which an employee agrees not to use or disclose an employer's confidential information.
• Nonsolicitation agreement:  an greement by which an employee agrees not to solicit - and, if well drafted, not to accept - business from the employer's customers.
• Antipiracy agreement:  an agreement by which an employee agrees not to solicit - and, if well drafted, not to hire - the employer's employees.
• No-hire agreement:  a type of antipiracy agreement by which a party agrees not to hire the other party's employees.
• Invention assignment agreement:  an agreement by which an employee assigns to the employer any potential inventions conceived of during employment.  (Typically, the inventions are only those that somehow relate to the work of the employer.)

For more information on these agreements, see, Beyond the noncompete. 

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In these extraordinary economic times, many employers are learning to think outside of the box and explore employment arrangements that may be new to the United States. Many employers are familiar with restrictive covenants such as noncompetition agreements and non-solicitation agreements. However, if the employer's objective is to delay the employee's termination of employment for a short period of time, there is another option available that may assist the employer. The employer may consider using a "garden leave" provision.

There are two types of garden leave clauses: one in which an employee is paid to "sit in the garden" and not compete for a post-employment period (essentially a noncompete agreement with pay); and another that restricts when employees may resign their employment by requiring that the employees provide a minimal amount of notice before their resignation becomes effective. As to the latter, once employees provide notice of their resignation the employees may continue to work in order to transition job responsibilities to their replacements, or the employers may immediately relieve the employees of their responsibilities and continue to compensate the employees for their time. 

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Cases and issues making the headlines*:

People Weigh In on Mass Noncompete Bill (July 26)
Just a brief note on the latest about the Massachusetts Ehrlich/Brownsberger noncompete bill.  (The current draft of the bill is available here.)  As you may recall, as the principal author of the bill, I had been asked to speak on a Boston Bar Association panel on July 22.  (If you don’t recall, see Freedom to Compete? A Symposium on Bills Affecting Non-Compete Agreements, Massachusetts Noncompete Debate Continues in In the News, and New Proposed Noncompete Legislation in Massachusetts….)

The symposium was attended by a sizeable audience, estimated at about 100 people, comprised primarily, but by no means exclusively, of lawyers.  After each of the panel members had an opportunity to speak, the questions and comments began.  (Symposium discussed in more detail here and here.)

The next step is to take the input into account, make any changes that may be warranted, and then off to committee, which is expected to be in the fall.

Check back for more updates as they’re posted.

California Trade Secret Litigation Forces Virginia Company Into Bankruptcy (July 26)
After a $36 million adverse verdict by a jury in a California trade secret trial, Virginia-based “new-generation” healthcare and telecommunications products manufacturer, Luna Innovations Inc., filed for bankruptcy.   (Story here.)

More on Goldman … and UBS (July 26)
The story about Goldman’s former executive brought up on charges of alleged theft of source code has been in the headlines quite a bit (see International Intrigue in the In the News archives).  For some further interesting reading, see Goldman’s Billions (explaining the significance of the software) and Reuters’ commentary (comparing the civil lawsuit brought by UBS brought to the criminal charges against the former Goldman employee).

The Computer Fraud and Abuse Act:  It Isn’t Just For Civil Claims Anymore (July 26)
Delaware blogger discusses the use of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, by the Department of Justice to address wrongs done in the workplace.  (Story here.)

Celebrities Claiming Trade Secrets (July 26)
Magician allegedly claims entitlement to royalties from levitation act containing trade secrets.  (Story here.)  Brad Pitt reported to have said that how he and Angelina Jolie “make time for [them]selves” is a “trade secret.”  (Story here.)

Microsoft Sues Under the Computer Fraud and Abuse Act (new July 19)
Microsoft sued Funmobile Ltd. and others claiming, among other things, that certain alleged spamming activities violated the Computer Fraud and Abuse Act, 18 U.S.C. § 1030.  (Story here.)  Microsoft’s associate general counsel for Internet Safety Enforcement, Tim Cranton, discusses the case and issues at Saying No to “Spim”.

IBM/Dell/Johnson – Trade Secrets (updated July 19)
The United States Court of Appeals for the 2^nd Circuit allows a former IBM executive to work for Dell pending expedited appeal.  (Story here.)  For an interesting discussion of the case, see Mr. Johnson’s Gambit.

Risks and Ethics:  The Dissemination of Proprietary Information (updated July 19)
Interesting posts on the debate over the ethics of spreading other people’s trade secrets and confidential information: Our Reaction To Your Reactions To the Twitter Confidential Documents Post; What TechCrunch’s Publication of Twitter Memos Means for Journalists.

Company President Goes To Competitor (new July 19)
West Virginia company, Gatewood Transportation, reportedly sued its former president (Glenn Hanson) and his new employer (Mystic Hills), asserting claims for breach of a noncompete agreement, misappropriation of trade secrets, and tortious interference with contract.  (Story here.)

Massachusetts Noncompete Debate Continues (new July 18)
Things have been moving quickly.  On July 2, we posted a story about an upcoming symposium on the state and fate of noncompetes in Massachusetts (see Freedom To Compete? A Symposium on Bills Affecting Employee Non-Compete Agreements).  On July 12, we posted a story about how Representatives Lori Ehrlich and Will Brownsberger, each the lead sponsor of their own noncompete bill, have been working together on a new bill (see Massachusetts Noncompete Debate Heats Up…, below in this In the News post). Yesterday, July 17, we posted a story about the combined Ehrlich/Brownsberger bill. Today, we provide links to posts concerning the recent debate: Preliminary comments on proposed draft of compromise non-compete bill; Latest on the Non-Compete Bill in Massachusetts; Non-competition agreements should be banned.

EMC/Donatelli/HP (new July 17)
For those who were watching and remember the legal wrangling on both coasts (in Massachusetts and California), you will recall that in May, EMC Corporation obtained an injunction against its former data storage executive David Donatelli, preventing him from working in certain capacities for Hewlett-Packard (HP).  (Story here and here.)  The injunction, however, does not seem to have prevented it from moving forward with efforts to expand its data storage business.  (Story here.)

First Economic Espionage Act Trial (new July 16)
Chinese-born engineer found guilty of economic espionage.  (Story here.)

Misappropriation of Computer Code (new July 16)
Goldman Sachs is not the only company from which proprietary computer trading code is alleged to have been recently misappropriated.  Apparently UBS sued three ex-employees, claiming that a similar thing has happened there.  (Story here.)

Another International Trade Secret Case (new July 16)
A federal court in California refused to discmiss claims of trade secret theft, intentional interference with business, and unfair competition against T-Systems Enterprise Services GmbH, an affiliate of Deutsche Telekom.  (Story here.)

International Intrigue (updated July 16)
Reports (e.g., here, here, and here) of the alleged theft of computer source code from Goldman Sachs.

When Noncompetes Expire… (updated July 16)
Trade secret litigation among Invista, DuPont, and others (here).  Litigation, however, is not the only impact of an expiring noncompete agreement.  See 3Com’s experience.  See also how people come back after a noncompete (here and here).

Another Criminal Trade Secret Case! (new July 14)
Two indicted on charges of, among other things, stealing trade secrets related to video games.   (Story here.)

Financial Services Noncompete (new July 14)
Financial advisors in Virginia, subject to FINRA and bound by non-solicitation agreements, were not enjoined.  (Case here.)

Ask A Court To Say You’re Not Bound By a Noncompete?  (new July 14)
A federal case in Illinois asking the court to say that the noncompete was unenforceable was dismissed as not “ripe” for adjudication.   (Story here.)

Physician Noncompete Agreements (updated July 14)
Physician noncompete agreements (unenforceable in many states) have been making headlines recently.  See, for example, here and here.

Massachusetts Noncompete Debate Heats Up… (new July 12)
Two noncompete bills are currently pending before the Massachusetts legislature.  (See below, Freedom To Compete? A Symposium on Bills Affecting Employee Non-Compete Agreements.)  One is sponsored by State Representative William Brownsberger, and would abolish noncompetes all together.  The other is sponsored by State Representative Lori Ehrlich (and drafted by me), and recognizes the need for reasonable noncompete agreements.  Accordingly, the Ehrlich bill seeks to follow on the efforts of the judges in the Massachusetts courts (including, in particular, those in the Business Litigation Session of the Superior Court) to provide a measure of clarity, predictability, and protection to both employers and employees.  Proponents and advisors on both bills have begun combining their efforts behind a refined version of the latter bill.  (See Boston Globe editorial, Clause for concern.)

The Plot Thickens… (new July 10)
More fallout following the Goldman Sachs reports (see International Intrigue):  Citadel Investment Group LLC/Teza Technologies LLC.

Trade Secrets/Employee Raiding
The Hartford Financial Services Group, Inc. sues, claiming employee raiding, misappropriation of trade secrets, unfair competition (here).

Inevitable Disclosure Doctrine Unavailing
Senior sales employee from American Airlines permitted to work for Delta Airlines (here).

Noncompetes in Franchise Agreements
Georgia Supreme Court restricts “in-term” noncompete’s application (here).

Trade Secret Verdict/Appeal
ClearOne Communications Inc. received a $10.5 million verdict (reduced by the court to about $9.7 million) in connection with employees found to have misappropriated trade secrets.  The verdict and the reduction are on appeal.   See Law360 (subscription service).

Noncompete from Sale of Business Gone Bad
Reed Elsevier/Hank Asher litigation over noncompete arising from the sale of a business (here).

*For earlier stories, go to the In the News (archives) page.

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For anyone following the twists and turns in the Massachusetts noncompete discussion (see Freedom To Compete? A Symposium on Bills Affecting Employee Non-Compete Agreements below), you will be interested to know that the two legislators, Representatives Lori Ehrlich and Will Brownsberger, leading the charge have combined their efforts to arrive at a new proposed bill.  This new proposed legislation (which I have been fortunate to have had opportunity to take the lead in drafting and, with others, including Rob Mantell, Caroline Huang, and Phil Gordon, to advise on) is available here, and is designed to provide a measure of clarity, predictability, and protection to both employers and employees. 

Before identifying the primary elements of the bill, it is important to know that it applies to noncompete agreements arising in an employment context - not to those arising in other contexts (such as the sale of a business).  Also, the legislation would not affect the use of other agreements, such as nondisclosure/confidentiality agreements, non-solicitation agreements, anti-piracy agreements, invention assignment agreements, or the like.  (For a discussion of those other agreements, see Beyond the noncompete.)

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The Wisconsin Supreme Court today issued a landmark decision changing the legal landscape in Wisconsin for covenants not to compete after employment.  Covenants not to compete have long been disfavored in Wisconsin.  Enforceable agreements are difficult to draft: litigants have taken to searching agreements with a fine-toothed comb to find any hint of over-breadth, then arguing that the unreasonableness of one restriction rendered all restrictions unenforceable.  This "void one, void them all" approach was fostered by a 2001 decision in which the court of appeals held that provisions are "intertwined and indivisible" if they govern similar activity - which almost all restrictive covenants do. Today, however, the Wisconsin Supreme Court overruled that decision, explaining that separate restrictions in the same agreement are "intertwined and indivisible" only if one provision cannot be read or interpreted without reference to the other.  See Star Direct, Inc. v. Dal Pra, 2009 WI 76.  If an otherwise enforceable covenant can stand on its own, it can be enforced even if another covenant in the same agreement is unenforceable.

The Star Direct decision opens the courthouse door to employers looking to enforce their non-compete agreements.  An employer who might have been hesitant yesterday to seek enforcement of a valid non-solicitation provision can now do so even if the non-solicitation section is in the same agreement as an unreasonably overbroad non-disclosure or non-competition covenant - as long as the non-solicitation provision can stand alone, without reference to the other, unenforceable provisions.

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Two related blog posts caught my attention.  Both were speaking to Massachusetts law, although the strategies and concerns are more broadly applicable. 

The first was on Innovation Economy, the blog run by Scott Kirsner, a reporter for (among others) the Boston Globe.  The entry was at the end of a post from July 8 (you'll need to scroll down), entitled "July 22nd Event on Non-Competes... New Blog... And Some Advice."  Mr. Kirsner had been speaking with an attorney who, quite correctly, observed that noncompete agreements "are enforceable even if you are part of a lay-off at your company."  (More on that later.)  Kirsner described that the lawyer had been employing a strategy on behalf of recently laid off clients who wished to be released from noncompetes:  trade about ¼ of their severance for a release of the noncompete.  From the employee's standpoint, that can be a very smart strategy (though see below).

From the employer's standpoint, however, that can be quite detrimental to subsequent efforts to enforce other noncompete agreements.  This is the point of the second blog, Michael Rosen's post, "Playing With Fire: Employers Waiving Noncompetes."  As Mr. Rosen correctly explains, "A practice of releasing employees from noncompetes will expose the company to ... [an argument] that the company has not sought to enforce the provision at issue against similarly-situated employees who have departed for competitors."  Thus, Mr. Rosen goes on to quite properly caution employers about the practice.

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Reports (e.g., here and here) indicate that trade secret and noncompete litigation is on the rise.  The spate of recent cases in the headlines confirms this.  (See, for example, U.S. v. Lee , Abbott Labs v. Mancheski, IBM v. Dell, EMC v. Donatelli).  Other blogs have recently commented on this trend as well.  (See "Eight ways to lose a noncompete case" and Litigation Over Non-Compete Agreements on the Rise).  

This increase in litigation may be the natural result of a corresponding increase in mobility in the workforce.  Some, however, may be better explained by the increased ease with which trade secrets can be misappropriated.  Indeed, this confluence of events seems to support a study finding that "nearly 60 percent of employees who quit a job or are asked to leave are stealing company data . . . ."  With the recent contraction in the previously-expanding workforce, more people changing jobs, and the high percentage of reported employee data misappropriation, it's no wonder that there would be a concomitant increase in trade secret and noncompete litigation. 

Whatever the cause, however, an ounce of prevention is still worth a pound of cure, and companies are well-advised to ensure that they have taken adequate measures to protect their trade secrets, confidential business information, and goodwill. 

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